Chris Gosselin, CEO of Australian Fund Monitors, speaks to Winston Sammut, Director Property, Euree Asset Management in the wake of the RBA meeting.Chris Gosselin: Welcome. My name's Chris Gosselin from Australian Fund Monitors. This morning, I'm talking to a veteran of the property sector, Winston Sammut from Euree Asset Management. Winston, welcome.
Winston Sammut: Thank you, Chris.
Chris Gosselin: Well, yesterday we had the RBA meeting or the second day of the RBA meeting. No change, as expected. What was your take on it?
Winston Sammut: Well, realistically, with the budget next week, it would've been difficult for them to make any changes. I think because everything is so data dependent, it's important that they see exactly what's in the budget before they make the next decision. But from the rhetoric that was spoken, it looks like it's going to be higher rates for longer, and we may not see rate cuts until early next year. They are very focused on the inflation number, and in fact, their forecast is that inflation will rise over the course of this year, as unemployment will as well. So they've got to take that into account and we need to see some actual numbers come through in terms of giving them confidence to say inflation is actually abating and it's on the way down at some stage.
Chris Gosselin: So inflation really is the name of the game, both in Australia and overseas.
Winston Sammut: Correct.
Chris Gosselin: We saw that from the US Fed last week. They're also waiting for the numbers, but they're really cautious because they haven't tamed inflation. And it does look as if it's just going to be stronger for longer.
Winston Sammut: Yes.
Chris Gosselin: But if that is the case, we're not seeing any improvement on inflation. The budget, which you mentioned, is likely to be, from what we've heard, inflationary if anything else.
Winston Sammut: Yeah. Well, these days, governments actually let news out about the budget before it happens. In the old days, nothing was said until the budget was actually released. So we know a few of the things that are in place and we know they want to do things to help people with cost of living issues. So it looks like it will be inflationary. Whether the RBA has factored that into their numbers, I'm not sure. But I suppose the extent of what the budget entails, we'll have to wait and see.
Chris Gosselin: Sure. So it's all down to the numbers. Let's see what evolves over the next month or two. Winston, as far as the property sector goes, which is your expertise...
Winston Sammut: Specialty?
Chris Gosselin: Life work, however to put it. How does all this affect and how has it affected the property sector since we've seen these much higher rates, relatively speaking, and now we've seen those rates plateau, we hope. What's in store for the property sector?
Winston Sammut: Well, they're facing a number of issues in terms of the direction for the sector overall. The first one is that valuations are down. And so apart from a couple of stocks that are trading at premiums to NTA, most of the rich are trading at discounts to NTA, which means they can't raise capital by issuing new shares.
The second issue here is that with higher interest rates, it means that their borrowing costs have increased, which impacts on their earnings. And what happened, if you remember last year around November, there was this talk or expectation that we're going to have five or six or seven or eight cuts this year, and everything was rosy. The sector was up 10% in November, and it was up 10% in December. And that euphoria has actually now gone away because there was a realization that rates are staying higher for longer. That's number one.
So we are not seeing also transactional activity that will actually help us in terms of finding out where values really are, because evaluation is just a number that a valuer comes up with. The real value of a property, for example, is when a buyer and a seller get together and agree on a price and it trades at that price, that's the real value.
To give you an example, Vicinity and ISBT just sold a retail asset in WA. At the peak, the valuation of that asset was $114 million. They just sold it for $70 million. So it's a big discount of the valuation. And also, a lot of the unlisted funds who have got redemptions queuing up, they need to sell assets at some stage. So we're in that environment where buyers want to pay this price and sellers want that price. There's a wide gap. Until we actually know what's happening with rates, it's not helping the sentiment.
Chris Gosselin: So how at Euree Asset Management do you manage that environment and that outlook for the portfolio?
Winston Sammut: Well, okay, having said that, there are a couple of stocks that have done well in this environment. Goodman Group, for example, because it's global, it's a growth stock, it's very lowly geared. It's now 36%, 37% of the A REIT 300 index. So it's very meaningful. So a lot of general equity guys are buying Goodman's as a proxy for the sector, and it's held up very, very well.
Another stock that's done well is HomeCo, which has also performed very well for a number of reasons. But what we are looking at is primarily those non-traditional property sectors. And by traditional, I'm talking about this commercial/industrial retail. We look outside of that in areas such as child care, which is government-supported, retirement which is also government-supported, rural property and also retail, but not the discretionary part of the retail market. The non-discretionary, so the supermarkets, those sorts of things.
And another area, which looks like it is starting to come into favor is the healthcare sector. And we have groups like DEXIS that is going into healthcare assets in a bigger way. Private hospitals, medical centers, all those sorts of things. So they're the sort of areas that I think do have some attraction going forward. As I mentioned, child care has got government support, retirement living has got government support. So they're not purely reliant on the economy per se, as opposed to some of the retail and office spaces. We are not very keen on office. It's still got a bit of transition to do from the working from home environment.
Chris Gosselin: Of course, it's not a homogenous area. As you've suggested, there's a whole range of different asset classes within property. You've mentioned the non-traditional areas. What about data centers?
Winston Sammut: That is an area of great interest. It's also a growth area because with all this artificial intelligence and the need for space, as it were out there in Neverland is growing all the time. And anyone that's got a good exposure to data centers has benefited and will continue to benefit. Even in this week's Macquarie Conference, Macquarie is looking to expand their exposure to data centers as well. So that's a good growth area.
Chris Gosselin: Well, if Macquarie is doing something in that area, it's normally a pretty good litmus to say that there's some good returns and profit in it.
Winston Sammut: That's right. That's right. So it's good.
Chris Gosselin: Winston, it's always enlightening to talk to you. Thank you for your time.
Winston Sammut: Pleasure.
Chris Gosselin: I look forward to speaking you next time.
Winston Sammut: Thank you.
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